Actor-Observer Asymmetry

Actor-Observer Asymmetry

Today marks ten weeks since the MyWallSt team started working from home due to the COVID-19 pandemic, a period of time that has somehow felt like both the longest and shortest part of my life. When you don’t really have anything to look forward to and weekdays start to bleed into weekends, everything kind of stops making sense. Routine goes out the window. Time becomes a flat circle. Today is the same as yesterday as tomorrow.

Maybe I’ve been rewatching too much True Detective.

 

Another paradox I’ve noticed emerging under lockdown, however, is that society appears to have simultaneously become more cohesive and divided at the same time. We’ve all heard the stories of communities banding together to help out vulnerable people or of the huge sacrifices being made by frontline healthcare workers, but we’ve also seen fights over toilet paper in supermarket aisles and curtain-twitchers calling the police on their neighbors for being outside too long. 

A lot of this negativity can be attributed to a psychological phenomenon called Actor-Observer Asymmetry, where people justify their own actions based on external situations and pressures while judging other peoples’ actions as purely indicative of their character.

Let’s take an example. Since the social-distancing restrictions began here in Ireland, we’ve had a run of pretty good weather which, if you know anything about Ireland, is really not all that common. Every weekend, without fail, Twitter and other social media sites are awash with photos of busy parks and beaches posted by people complaining that rules are not being adhered to.

Of course, I wouldn’t be the first to point out the irony in people going to parks and beaches to take pictures of other people being there in the first place. In fact, it’s a perfect example of Actor-Observer Asymmetry in action — I’m here because I need to get some fresh air and exercise, everyone else is here because they’re selfish.

We see this in all walks of life. If you are diagnosed with diabetes or high cholesterol, you might point to a variety of factors outside of your control like genetics to explain it. If someone you don’t know receives a similar diagnosis, well maybe they should have cut back on the hamburgers and gotten a little more exercise.

So how does this all relate to investing, you might ask? Don’t worry, I’m getting to the point.

The stock market can sometimes seem like some kind of long-running social experiment. Over the course of a day you will witness a full range of irrational behaviors in action, everything from confirmation bias to feedback loops and the Dunning-Kruger Effect (all of which we’ve written Daily Insights about previously). Actor-Observer Asymmetry is another one of these behaviors that occurs quite often and to be aware of it is to gain an edge over your biggest adversary — your own irrational self.

Think about some of the biggest investing flops over the past few years, everything from Enron to the Financial Crisis and even the recent Bitcoin Bubble. It’s easy to sit on a high horse and say that people burned by these things were either selfish or stupid, but a more accurate assessment will recognize that they were influenced by the same situational factors you and I face every day — the desire to make money, a fear of missing out, a willingness to believe or trust in the wrong person, over-confidence.

Not only does an awareness of how Actor-Observer Asymmetry works make you a more empathetic person (and let’s face it, the world could do with more of these), but it helps you to tune into the decisions you make on a day-to-day basis and analyze them more carefully. 

Believing that other people make bad mistakes because of something inherent in them naturally leads towards believing that you’re immune from similar results, the classic “I would never let that happen to me.” 

On the flip side, understanding that everyone’s actions are driven by a combination of external pressures and internal biases means that, in the future, you can challenge your own perceptions before making an important decision.

JamesJames

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